The True Cost of “Hollywood South”

It only took Louisiana eleven years and $1 billion to buy the title it’s always wanted—“Hollywood South,” the movie-making capital of the world. In 2013, it surpassed the film industry’s old standbys, California and Canada, by having eighteen major-studio releases shot mainly within its borders—from critics’ favorites (12 Years a Slave) to mindless blockbusters (G.I. Joe: Retaliation) (PDF).

Some would call this proof that business-friendly policy works: in spite of TV’s recent fetishization of the state’s most grotesque subcultures (see Swamp Peopleand True Detective), this current taste for Louisiana settings has little to do with geography. Film producers have made it clear that the state’s tax-credits program is almost solely responsible.

But this program, like similar film-incentives programs in thirty-seven other states, doesn’t buy much beyond (dubious) prestige. Movie studios typically don’t owe much in taxes in the first place, so many states let them sell their credits to other companies—which gives rise to shadowy, exclusive markets. Now, as Louisianans are realizing they’ve been duped, the system is so entrenched that serious reform is almost impossible.

When Louisiana stepped up its film-production incentives in 2002, it started a trend that has altered the economics of the film industry; almost every other state has followed its example, offering ever-larger handouts in order to compete. Colorado, for instance, subsidizes the costs of big-budget films by 20 percent; many states, including Massachusetts, Maryland, and New Mexico, offer up to 25 percent (PDF). Only by offering a 30 percent subsidy, with no annual limit to the payouts, has Louisiana managed to come out on top—or the bottom, depending on one’s perspective. The New York Times has estimated that the industry now rakes in $1.5 billion in public money each year.

Nor does the public fully understand the arrangement being sold to them. The phrase “tax credits” can deceptively evoke the language of limited government, as though the states were simply offering discounts. But in actuality, movie studios seldom spend much money in the states where they film—they only stay on site for periods of weeks—so tax discounts don’t necessarily benefit them much. This explains why many companies sell off their credits instead.

State laws cloak these transactions in secrecy, so it’s impossible to find out who’s ultimately receiving the tax breaks. Louisiana’s lawyers, for instance, denied my request for last year’s list of the final tax-credit recipients. But Jeff Jacobson, who runs the brokerage company Clocktower Tax Credits, told me that common buyers range across the Fortune 500: they include companies like Geico, Bank of America, Walmart, and Apple. Sometimes wealthy individuals buy them as well, Jacobson said. But for the most part, because of the scale of these transactions, only those with colossal tax bills—in other words, the super-wealthy—can afford to take part.

Here’s an example of how a film credit deal might work: If Paramount Pictures receives a $20 million credit from Louisiana, it might sell it to Bank of America for $18 million. Bank of America reduces its tax spending by $2 million, the broker pockets a commission, and Paramount keeps the rest. This transaction shares the effects of a handout and a corporate tax cut simultaneously. It also explains how the market can support its own brokerage industry; at least nine or ten companies now have their own Internet exchange portals for tax credits,including Moss Adams, one of the top U.S. accounting firms. Danny Bigel, the CEO of Online Incentives Exchange, which supplies the technology to Moss Adams, told me he expects at least ten more to open this year.

The rhetoric that lobbyists use to defend these incentive programs is exaggerated, to say the least. Sure, tax credits for film companies create (temporary) jobs—but in Louisiana’s case, they create them at a cost of $60,000 each, more than enough for a teacher’s salary (PDF). It’s true that there’s also a “multiplier effect,” where every dollar invested in the program circulates through the economy to produce more tax revenue—but this can be said for any public-sector job. Nor can Louisiana’s film industry ever be self-sustaining, because studios will always chase the best incentives.

Most comical is a new campaign in Louisiana to demonstrate that the film industry is creating a tourism economy. Most movies being filmed in Louisiana now are either effectively set nowhere—see Jurassic World and Terminator Genisys—or, like Dallas Buyers Club, are explicitly set elsewhere. And as Jan Moller, director of the Louisiana Budget Project, a liberal watchdog group, pointed out to me, the movies explicitly set in Louisiana tend to dwell on its ugliest elements (see 12 Years a Slave).

Moller says some Louisiana policymakers really do believe the industry propaganda, while others hope the glamour of the movie industry will rub off on their reelection campaigns. But mainly, he says, the tax-credit program survives because policymakers are beholden to lobbyists. Its most visible advocate—Will French, president of the Louisiana Film Entertainment Association—also runs a brokerage firm that sells these credits.

But whatever happens in Louisiana, the film industry can’t lose. This past summer, in hopes of reclaiming its old title, California quadrupled its tax incentives.

Nick Tabor is a freelance reporter living in New York. He previously covered jails in Kentucky and politics in Maryland.